The FSA’s long awaited policy decision on the controversial CP 12/19 consultation paper is due out in April 2013. The basic premise of the paper – which was released in August last year – is a ban on the promotion of unregulated collective investment schemes (UCIS) and close substitutes to ordinary retail investors in the UK.

Through research, the FSA found that some investors were being exposed to unreasonable levels of risk, so the proposal is to restrict the marketing of certain products, which they deem to be non-mainstream pooled investments (“NMPI”) to “high net worth” or “sophisticated” Investors.

Originally, the FSA implied that Enterprise Investment Schemes (EISs), Venture Capital Trusts (VCTs), Real Estate Investment Trusts (“REITS”) and some Exchange Traded Funds (“ETFs”) would fit within the definition of (“NMPI”). However, the FSA this week announced that it no longer expects to include VCTs, REITS and some ETFs in the definition of NMPI and that EIS is under review.

EIS Expert Comment:

Dermot Campbell, managing partner, Kuber Ventures comments on why continuing to consider EIS within this legislation is going to cause confusion, a closed market and ultimately open it up to the threat of mis-selling.

Dermot Campbell said:

The raison d’etre behind EIS is to stimulate the flow of private funds into the SME sector. If they are categorised as NMPIs the market will shrink and this source of private capital will simply dry up, further paralysing economic growth.

We are living in a time when small businesses find it difficult to borrow from the banks, when Government lending schemes appear to be having little impact and at a time when the economy needs a much needed injection of capital.

Limiting the effectiveness and accessibility of EIS products to investors is not only detrimental to small businesses but could have far reaching consequences to the underlying strength of our economy for years to come.”

Money by Ian Britton -

Money by Ian Britton –

But the really worrying aspect of CP 12/19

If legislation drives EIS investment into the shadows, a number of non-regulated distribution companies will emerge, which can legally promote complex investments under the PCIS Order (Promotion of Collective Investment Schemes) or the FPO (Financial Promotions Order).

These two pieces of legislation allow firms to promote investments to HNWIs, or ‘sophisticated’ investors without being regulated and with no requirement for them to have PI insurance.

Simply put, if the FSA chooses to go down this route, they will not be banning the promotion of UCIS or NMPI, but simply refusing to regulate it. This leaves the HNWI without a safety net, instead leaving them to fend for themselves.

If the FSA pushes ahead with its policy as set out in the consultation paper, the outcome will be that many regulated advisers will stop promoting these investments completely, because of the heavy cost of PI insurance and problems fulfilling their regulatory obligations. This will accelerate an explosion in unregulated distribution channels.

At a time when everyone is acutely aware of mis-selling financial products, we stand on a precipice, where the decisions taken now will govern the future for EIS investments. 

We believe this a step back into the pre-regulation dark ages but in an era when financial products are significantly more complex and potentially dangerous. RDR addressed all the issues associated with unqualified salesmen pushing complex and risk laden products to unsuitable investors.

CP 12/19 – if given the green light as it stands – could start to undo the good that RDR has done. The FSA needs to focus on drafting effective legislation to regulate advice and be mindful of throwing thousands of investors to the dogs.”

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